Presentation on theme: "Important part of product positioning"— Presentation transcript:
1Important part of product positioning PRICINGOften the only marketing mix variable allowing for immediate competitive responseImportant part of product positioningLong term effects of pricing decisions—your decisions may come back to haunt you!
2Learning Objectives Understanding Price choices faced by managers, the constraints faced on these choices (e.g., legal), and the consequences of these choices“Signaling” effects of product pricesThe respective interests of manufacturers and retailers in product pricingAppreciating the advantages and disadvantages of different pricing strategies
3_____________________________________ One View of PricePrice =resources given up_____________________________________goods receivedE.g., 12 bullets for $6.00 = $0.50 per bulletWays to change the price:Sticker priceQuantity—same sticker price but lesser quantityQuality—use of lower cost materials—e.g., “gooeye” stuff rather than chocolate in candyTermsE.g., support, accessories, payment terms, delivery
4Views of Consumers and Price Response EconomicsAssumed to have perfect information aboutQuality of all brandsPrices of each brand at all locationsElasticity: A “down-sloping” demand curve means that a higher quantity will be demanded when the price is reducedMarketingConsumer knowledge of product quality and prices is imperfectDue to imperfect information, a higher price may sometimes be used by consumers to infer greater quality (Research suggests that actual product quality as rated by Consumer Reports accounts for about 25% of product price differences among brands)
5Supply, Demand, and Quantities Supplied and Demanded
6Supply, Demand, and Quantities Supplied and Demanded Supply: The “schedule,” or “curve,” of quantities supplied by the sellers at various prices offered by buyersTends to increase with price—a greater quantity will be supplied at a higher level of incentive to produceDemand: The “schedule,” or “curve,” of quantities demanded by the buyers at various prices offered by sellersTends to decrease with price—the marginal value of additional quantity tends to decline with a greater priceOccasionally, higher prices may lead to higher quantity demanded due to a possible “signal” of qualityEquilibrium: The intersection of the supply and demand curves—neither side is interested in buying or selling more or less given the resultant market pricesThis equilibrium may be temporary and may change once the market changes—e.g.,Changes in the availability change in supplyChanges in cost of production change in supplyAvailability of new substitutes change in demandQuantity supplied: The quantity that will be supplied (sold) by sellers at a given price pointQuantity demanded: The quantity that will be demanded (bought) by buyers at a given price point
7Price Discrimination Explicit Only some customers are eligible for special pricing—e.g.,Student discounts on softwareSenior citizen discountsGeographic: Only customers in the 900**-935** zip code areas are eligible for discount Disneyland AdmissionImplicitNo outright rule, but discounted deal is unattractive to some customersAirlines: Saturday night stay-over or advance purchase requirementDaily special meal—one cheaper meal but no choicePeriodic discounting (products going on and off sale)
8Some Approaches to Pricing Cost-plus: Add fixed percentage markupSkimming: high intro price ---> take advantage of price insensitive consumersPenetration pricing: low intro price ---> volumeBuyer-basedPerceived valueGoing-rate (competition)---> Balancing cost andmarket considerations
9Skimming PricingP2P3Q3The product is introduced at a high price, P1. Very few customers—only the least price sensitive ones—buy at this price. When the price is later lowered to P2 and then to P3, other customers who value the product less will start to buy.The least price sensitive customers pay a premium for quick access to the new product.
10Penetration PricingP1Q1The product is immediately introduced at a relatively low price. The seller sacrifices the higher margins that would have resulted from selling to some customers at a higher price, but, in return gains immediate sales. Fewer competitors are attracted into the market since the apparent profits are not as high. Because of economies of scale and experience curves—the tendency of production costs to decline with the cumulative production—costs are reduced.
11Legal Issues Banned by Federal law: Discrimination in prices paid by firms which compete against each other unless supported by evidence of cost savingsOK to charge restaurants more than grocery storesCan only charge Wal-Mart less than Joe’s Supermarket if volume savings can be proven—and the price difference must be no greater than the actual provable cost savings.Banned by some state laws:Gender discrimination (e.g., charging more for dry cleaning women’s clothes than men’s clothes)Discrimination between consumers in generalSenior citizen discounts are explicitly permitted in California
12More Legal Issues Federal and State bans on: Collusion (coordinating or even discussing prices with competitors)Predation (offering temporary prices below cost of production to drive competitors out of business and then raising prices)In general, fully absorbed average cost must be used—cannot use marginal costUsing monopoly power in one market to “subsidize” new market
13Price MaintenanceIn 2007, the U.S. Supreme Court reversed the longstanding ban on explicit agreements between manufacturers that the branded product would not be sold below an agreed upon “floor” priceAlthough setting minimum retail prices for a brand reduces intra-brand competition (competition between different retailers selling the brand), some believe that minimum prices may encourage investment in service and brand building to the extent that competition between brands increases (inter-brand competition)Manufacturers generally cannot enforce minimum price agreements on existing inventory, but they can “cut off” offending retailers“Gray market” goods: Retailers in the U.S. generally have an absolute right to sell products that they have bought legally at a price lower than the suggested retail price.Diversion: Legitimate retailers buy up extra quantity to be resold to unauthorized dealers and/or geographic shipment. (More details will be given under distribution).
14Other Manufacturers’ “Suggested” Retail Prices (MSRPs) U.S. manufacturers often put an exorbitantly high “suggested” price on a product so that even full service retailers can look good by selling below the MSRPIn some EU countries, selling below the MSRP may not be legal—manufacturers must therefore be careful not to “recommend” excessive prices
15INCOME ≠ WILLINGNESS TO SPEND! REMINDERINCOME ≠ WILLINGNESS TO SPEND!
17Introductory EffectsIn an experiment, laundry detergent was introduced at $0.49 in one condition and $0.79 in another.After 8 weeks, price was raised to $0.79 for low price intro condition.There were higher cumulative sales in high price intro.
18Consumer Price Awareness A survey revealed of consumers who had just selected a product suggested:Avg. time spent before departing from product area: 12 secondsAvg. no. of products inspected: 1.2; only 21.6% claimed to check price of non-chosen brand55.6% could state price of just chosen product within 5%
19Consumer Reference Prices Consumers typically have some expectation of what they will pay. This is based on:previous experiencecommon senseperceived fairnessTwo kinds of reference prices:Internal: Based on consumer’s memory.External: Based on environment (e.g., signs, other products in the store)
20Internal Reference Prices Consumers tend to develop some memory of prices of frequently purchased items ---> to make store prices look low, you may want to price especially salient products lowerMore knowledgeable consumers typically have tighter price range expectationsReference prices are constantly updated to some extent, but are hard to change upwards--certain unreasonable “stimuli” (prices) may be rejected as unrealConsumer reference prices tend to be lower than actual prices ---> “sticker shock”
21External Reference Prices Reference prices provided by seller or environmentE.g.,“MSRP $3.99; our price $2.49”“Sold elsewhere for $20.00; our price $14.99”“Was $100.00; now $69.95”
22The Promotion SignalA segment of consumers will respond to negligible discounts--e.g., “SALE! $3.95 (Was $4.02).However, merely placing a sign “EVERYDAY LOW PRICE” randomly also increased sales of affected products.
23Odd/Even Pricing--Does It Have an Impact? Theory: $3.00 is rounded to $3.00 while $2.99 is rounded to “$2.00 plus change”Reality: Studies in U.S. have found a small impact; no impact found in GermanyNote that odd pricing may signal receiving a bargain, which may nor may not be compatible with the desired product imageOdd pricing has typically been used by tradition (initially implemented to force cashiers to ring up purchases).